Notes for trust officers, private bankers and others concerned with estate and trust planning, from a Merrill Anderson Senior Editor and his retired mentor.

Monday, October 15, 2007

Vanguard Seeks to Endow Retirees

Recently Jim Gust noted that Fidelity and Vanguard have each announced new fund-of-funds packages to provide income for retirees.

The two fund companies have chosen strikingly different approaches.

Fidelity's Income Replacement funds will provide annual income (in monthly installments) at rates calculated sort of like the required minimum distributions from IRAs. But the final payment will occur in a year of the investor's choice, independent of his or her presumed life expectancy. The final year's payment depletes the investment.

As this article in The Wall Street Journal (subscription) points out, Vanguard's new funds are something else altogether:

Vanguard's funds are designed more like endowments, and in theory, they could generate a payment stream forever. The payouts will be calculated based on a percentage of your average account balance over a rolling three-year period. That should minimize the impact of any single year; one great year shouldn't trigger a spending spree, and a bad year won't mean TV dinners.

Investors can choose among annual withdrawal rates of 3%, 5%, and 7%, spread over 12 monthly payments. The fund with the smallest payout is designed for those who want their balance to grow. The fund with the biggest payout aims to hold the balance steady.

With these funds, too, payments could vary from year to year. As endowments do, the funds will invest in stocks, bonds, real estate and commodities, and will use derivatives, as well as a market-neutral strategy.

Most of the underlying investments will be Vanguard funds, including the firm's new long-short fund, which is still in registration.

For a company best known for index funds, Vanguard's approach sounds bold and innovative. If a market downturn doesn't nip the venture in the bud, scads of affluent investors might buy in.

Think of it, a retirement investment program with some of the same sophistication one might find at Bessemer or Northern, but costing only about one-third of one percent annually,